Examination of Witnesses (Questio Numbers
40-59)
DEPARTMENT FOR
TRANSPORT AND
LONDON UNDERGROUND
PPP ARBITER
19 OCTOBER 2009
Q40 Mr Touhig: Good; on both counts.
Mr Devereux: If you are interested
in the lessons learned, we will go on to those.
Q41 Mr Touhig: On page 6, paragraph
10 we see that you told those who loaned money to Metronet that
you would step in if there were a problem. Why did you do that?
Mr Devereux: We did two different
things. First of all, the deals were structured on the basis that
London Underground itself guaranteed 95% of the debt and associated
costs in the event of a default. Since the lenders were looking
at London Underground and seeing a body largely financed by the
Department itself, they looked to us for some comfort that, were
LUL unable to meet that guarantee, we would not leave them in
a position where they could not meet it. We issued a comfort letter
to the effect that we would meet that. To answer the question
why we did it and why the number was 95%, you will be aware from
conversations with my predecessor and some of the evidence from
the Transport Select Committee that, at the time these deals were
being brought to conclusion, there was a fairly substantial disagreement
going on between the Government and then Mayor as to his likely
attitude to these contracts which in our judgment affected the
level of guarantee which was ultimately given.
Q42 Mr Touhig: So although you did
not guarantee Metronet's borrowing, you were under pressure to
protect the investors.
Mr Devereux: No, the point I am
making is a slightly technical one. London Underground guaranteed
the borrowing. We gave a comfort letter to the lenders to say
that in the event that guarantee was called, we would not stand
by if they found themselves unable to meet it.
Q43 Mr Touhig: I wish you were my
bank. Can we go on then? We see on page 22, paragraph 2.23 that
when Metronet went into administration in 2007, you made £1.7
billion available to pay its lenders. Can we get back to the point
I was just asking about? That meant that you picked up the tab
for the 95% guarantee that Transport for London offered.
Mr Devereux: I paid £1,700
million for a settlement of an obligation which the NAO records.
Q44 Mr Touhig: So you picked up the
bill. They gave a guarantee and you picked up the bill.
Mr Devereux: TfL paid £1,747
million and I paid £1,700 million, so I substantially picked
it up.
Q45 Mr Touhig: So the taxpayer substantially
picked it up because of your Department. Can you understand that
there must be a lot of anger at this awful waste of public money?
Would it not have been simpler to have given these people the
keys to the Royal Mint at Llantrisant and they could have gone
in and printed their own money? It is an appalling effort on your
partner's part, is it not?
Mr Devereux: I am afraid I am
going to come back to the same line I took with the Chairman.
We are talking about a particularly complicated investment and
upgrade programme in tunnels where there is a great deal of uncertainty
as to what is in there. Previous attempts to do this have produced
very, very substantial cost overruns. We have tried something
different this time in the context of a devolved settlement and
the extent of the uneconomic cost which has now been estimated—and
you have never had one before in this Committee—is actually
lower than the overall cost overruns previously. What am I pleading?
I am pleading that we are protecting the taxpayer better than
our predecessors but clearly not perfectly.
Q46 Dr Pugh: There were cost overruns
in the past, I understand the point you are making, but nevertheless
we do not have the improvements we were expecting to get and,
as the Chairman said, four years for the whole project instead
of 30 years.
Mr Devereux: I am sorry. You said
you do not have the improvements you expected. Some things clearly
have not been delivered to the time expected, some things have.
We do have District Line trains refurbished, we do have a Jubilee
line, we do have Wembley Park; the list is growing all the time.
Q47 Mr Touhig: So it is growing all
the time.
Mr Devereux: To say that you do
not have any benefit is wrong.
Q48 Mr Touhig: I did not say we do
not have any improvements. We have not had what we expected to
have.
Mr Devereux: You have not had
what you were expecting but the C&AG is telling you that £4,500
million has been economically and efficiently spent. I would have
thought the Committee would welcome that.
Q49 Mr Touhig: I am sure we do but
we do not welcome the fact that your Department oversaw and were
responsible for a massive draw on the taxpayer, wasting public
money. I think you ought to be ashamed of yourselves.
Mr Devereux: I explained already
that the massive draw you keep coming back to, the £1.8 billion,
is not of itself an estimate of loss, nor does the C&AG accept
that.
Q50 Keith Hill: I probably ought
to begin by making a declaration of interest, not for the first
time. I was the Minister for Transport in London between 1999
and 2001 and the chief public advocate of the London Underground
PPP; very enthusiastic. My excuse is of course that I had moved
on to other things by the time the contracts were signed. Naturally
I am disappointed with the way the Metronet contracts developed.
I recognise that the DfT was not a party to the contracts but
the Department were paying £1 billion a year to TfL specifically
for the PPP contract and in the end, as we know, had to provide
£1.7 billion of public money when Metronet went bust, of
which up to £410 million was not spent economically or efficiently.
Therefore I do sense that in these circumstances the Department
did adopt a rather arm's-length relationship with the project.
It liaised with London Underground and TfL. As the problems of
Metronet developed, you received informal briefings from the Arbiter
but you did, for example, refuse to meet directly with Metronet.
Mr Devereux: Indeed.
Q51 Keith Hill: We have to think
really about this management for the future and I want to turn
to the recommendations which the NAO make in recommendation B
on page 9 and ask really how the Department propose to respond
to these proposals. First of all, it is recommended that the Department
should "collect and analyse a range of financial and performance
data held by parties to the contract or available independently".
Is that work underway?
Mr Devereux: Let me start by coming
back to your observation about the letter my predecessor wrote
on 17 May because I have it in front of me. Let us just think
what the alternative is. Here I have two parties who have signed
a contract with respective obligations in, and it becomes apparent
to all parties that Metronet the company is not delivering what
it should do. In those circumstances I understand perfectly why
my predecessor chose not to accept a briefing from the Metronet
chief executive who, I suspect, was at that stage seeking somehow
to make his case to a party who was not responsible for fixing
it. If you think about what sort of messages would be sent, you
risk the public sector giving mixed messages about what is going
on here. It seemed to him far better that the contractual counterparty,
in this case London Underground—and we did know what they
were doing—should get on and have those conversations, not
the Department to give its own views and opinions to Metronet,
but rather say "Look, this is your problem, you need to fix
it"—
Q52 Keith Hill: Sorry to cut across
you but my time is limited. That is a bit of historical speculation
in a way.
Mr Devereux: But it is the reality.
Q53 Keith Hill: Going forward, there
does seem to be a strong argument that DfT should perhaps be a
little more on top of what is actually happening—I was going
to say on the ground—in this case under the ground. Just
let me ask. Are you collecting data about performance in a way
that maybe historically you did not? That is a yes or no one really.
Mr Devereux: The answer is that
I already have performance data, which I was telling you that
I was looking at, both in respect of what LU was up to and also
what the Arbiter was telling me. I do have information such as
that.
Q54 Keith Hill: Okay. In that case
I will take it that the answer to the first proposal under recommendation
B is yes. What about the second item in the recommendation which
is to "request regular risk reports from London Underground
and TfL as the contracted clients"?
Mr Devereux: The reason I am just
pausing on this is because I do want to come back to the nature
of the devolution settlement with the Mayor. I do not know whether
you've had a long conversation with the Mayor about his view as
to where the buck stops with him and where it goes to the Department.
But when it comes to these contracts, I am indeed paying £1
billion for the Tube through a grant, a grant which Parliament
has specifically restricted me from setting any conditions on,
conditions along the lines of "By the way, here's £1
billion, I'd like to see the following information every Monday
in my office; I'd like to see all these risk reports".
Q55 Keith Hill: But it is possible
for departments to have a close and successful and efficient working
relationship with third parties which have devolved expenditure.
We have had before us quite recently the Department for Children,
Schools and Families to talk about the Building Schools for
the Future programme which, after a bit of a faltering start,
is proceeding very, very efficiently, delivered by local government
primarily but on the basis of a very close working relationship
between national government and local government. Here you have
national government and a regional authority. Surely it ought
to be possible for you to have and expect regular risk assessments
from London Underground about the progress on both the contracts
on which we are expending £1 billion a year.
Mr Devereux: I am agreeing that
it ought to be reasonable to ask for that. In practice, the nature
of the relationship we have with TfL is that we see a lot of this.
I am trying to draw a line between what actually happens in practice
as a piece of influence and what I can require as a piece of policy
and legislation. Were the Mayor to determine that he did not want
to show me this, he would be entirely within his rights as Parliament
has granted to him.
Q56 Keith Hill: I understand that
but I am sure this Mayor, just like the last Mayor, would be only
too willing to work on a reasonable basis with the Department
on this, if requested to.
Mr Devereux: I agree and when
we come onto the future that is the place we are going to be.
Q57 Keith Hill: I am on the future
now. Let me just ask you finally about the third part of recommendation
B, and this is what we have been talking about, "review the
devolved body's understanding of the key risks of the project".
This is really very important, is it not? At the end of the day
you really, as a department, relied on London Underground and
TfL to assess whether the project was being delivered in a cost-effective
way.
Mr Devereux: Yes.
Q58 Keith Hill: And actually it is
perfectly arguable that they did not, particularly in the case
of Metronet, monitor and scrutinise the performance of that body
in as much detail as possible. Therefore it is very important
for you to be assured that they are going to do that job properly
in the future. Do you have that assurance?
Mr Devereux: The position on where
we are going to be in the future is covered by recommendation
F later on, is working with the Mayor and TfL on what the successful
arrangements for Metronet are. I am expecting my Secretary of
State and the Mayor to make announcements about this very shortly.
I think that will give you some comfort that we are in the space
of reasonable men.
Q59 Keith Hill: That is very interesting.
We look forward very much indeed to that. It seems to me that
you have been really rather positive about the future role of
the Arbiter. I think I quote you correctly when you said in retrospect
that the Arbiter should have been given greater powers. Actually,
if you look at recommendation E on page 10 three powers are set
out there which the NAO recommends that the Arbiter should exercise
in future, namely to carry out recommendations, where appropriate,
to require an annual review of the Arbiter and to allow an extraordinary
review even if not requested by the parties to the contract. Is
it your intention as a Department to strengthen the Arbiter in
this way?
Mr Devereux: Strictly speaking
one, two and three are not all addressed to the Arbiter but the
general point is this. If we are to exist in a world in which
LU on the one hand and a contractor on the other is delivering
work with very large sums of money at stake, I want to see a degree
of transparency about what is going on there and a degree of prospective
looking at what is economic and what is inefficient.
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